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December 16, 2013

Verizon is near an agreement to purchase Intel's Internet-based pay-TV startup, according to people familiar with the discussions. The deal may be announced as soon as this week, after final details are complete, said the people, who asked not to be identified because the talks aren't public. Intel, which developed the service called OnCue, began looking for a buyer this year rather than invest in the programming and bring it to market on its own.

Verizon, the second-largest U.S. communications company, will use OnCue to extend its pay-TV offering beyond the geographic footprint of its FiOS fiber-optic service. That could shake up pay TV, by bringing more competition to cable companies that dominate territories, as well as satellite companies with wide coverage that lack the interactive capability of the Web. "It has the potential to change U.S. pay-TV forever," said Andy Hargreaves, an analyst with Pacific Crest Securities in Portland, Ore. "Untethering the linear video service from the network could dramatically increase competition."

OnCue is designed to provide pay-TV programming over any high-speed Internet connection, making it a threat to cable-TV services that deliver shows over dedicated lines restricted by territory. Intel's system includes servers, set-top boxes and applications that can stream content to televisions, phones and tablets. In the hands of Verizon, the product could help spark a trend toward so-called "hardware light" video services, Hargreaves said. That would let people start, stop and switch video services more easily, and could accelerate a shift toward more interactive advertising and advanced analytics, he said. Intel, the world's largest chipmaker, decided to divest the business after its new management opted to focus on selling chips for mobile devices, said one of the people.

Earlier this year, Intel delayed plans to begin offering the service to subscribers by the end of 2013. The company was asking about $500 million for OnCue, people with knowledge of the situation said in November. Bob Varettoni, a spokesman for Verizon, declined to comment, as did Intel's Laura Anderson. Verizon, based in New York, has been asking media companies if a streaming product would require new contracts for programming, or whether existing FiOS TV agreements could be amended to include the additional rights, people with knowledge of the situation have said. Intel, based in Santa Clara, Calif., fell 0.7 percent to $24.29 on Friday in New York. The shares have advanced 18 percent this year. Verizon slipped 0.6 percent to $47.84, leaving it with an 11 percent year-to-date advance. AT&T, based in Dallas, is the largest U.S. communications company.

Intel backed off of its TV efforts under new Chief Executive Officer Brian Krzanich. He took the reins in May and is focusing on revitalizing its efforts to win orders from mobile phone and tablet makers as sales of those devices erode demand for its traditional market, personal computers. Intel's efforts to create a Web-based pay-TV alternative have attracted some criticism from potential competitors including DirecTV CEO Mike White, who runs the largest U.S. satellite-television provider. "I don't think the Intel idea is a very good idea," White said on Thursday at the company's annual investor day. The main drawback is that it requires customers to get a separate broadband connection, White said, so it's not a stand-alone service. White also said he wasn't sure whether an Internet-based approach could handle all the traffic generated by streaming services like Netflix. Bloomberg

Laboring under a surprising load of online-video traffic, Verizon Wireless has had to spend millions more this year to upgrade its network. The cellphone carrier long enjoyed a reputation for having the country's most robust network, while rival AT&T Inc. suffered complaints about call quality. But now it is Verizon that has been caught off guard by the onslaught of data traffic, contributing to what its executives have acknowledged is a performance decline in key cities such as New York, Chicago and San Francisco.

In some places, wireless download speeds on Verizon's high-speed 4G network have dropped more than 20% since last year, according to data from industry tracker RootMetrics. "There are certain hot spots that frankly the network hasn't performed at the level that we would like it to," Lowell McAdam, chief executive of Verizon Wireless parent Verizon Communications Inc., said at an analysts conference last week. In October, Fran Shammo, chief financial officer, said the carrier was having "a little bit of a speed issue" in New York, San Francisco and Chicago. The congestion was pushing users off Verizon's 4G LTE network and onto its slower 3G service.

Customers seem to have noticed. Damon Leonhard said Verizon coverage is fine in his hometown of Dublin, Ohio, where he has been a customer for about a decade. But, he said that he has a hard time with data traffic when traveling to denser urban areas like Los Angeles or Atlanta. Mr. Leonhard, who makes digital maps, said data coverage has been so poor that it partly spurred him to buy a second phone on T-Mobile as a backup. "It really bugged me," he said. "If [Verizon] could get past this congestion issue, they would be my favorite network."

In the second quarter, Verizon said it would increase spending by about $500 million during 2013 on wireless-network improvements. Recently it began rolling out additional wireless spectrum in about 50 cities to boost speeds and help alleviate congestion. The company expects to complete the work in the first half of next year. As more wireless subscribers gain access to faster networks known as 4G LTE, more of them are using their smartphones to stream high-definition videos. For the carriers, that's both a blessing and a curse.

AT&T and Verizon have reworked their service plans over the past couple of years to get rid of unlimited data, in favor of packages under which subscribers pay more if they use more data. After years of trying to offload data traffic to Wi-Fi hot spots to reduce strain on their networks, the carriers now are trying to get consumers to use more data to drive revenue growth. "We have really high expectations in terms of video consumption," AT&T CEO Randall Stephenson told investors Tuesday. "We believe that is where the next round of growth, or even the next wave of growth, in this industry comes from."

But while the growing popularity of mobile video means customers use more data, and therefore pay a larger bill, it also means more network congestion. Verizon finished extending its 4G LTE network across the country earlier this year, while its competitors continued building. And its network is still far larger, helping it add more than 2.5 million contract customers this year through September. But all those new users caused some congestion, in part because too many of them have been streaming high-definition videos. "Consumption of video is far outpacing what our expectations were," Mr. Shammo said at an investor conference last month. "You have 3G customers migrating to 4G, and what we see is that the minute that they migrate over their video consumption goes way up, and they're more than doubling, if not doubling, their usage."

Verizon's download speeds as of October had dropped roughly 29% in San Francisco and 15% in Chicago since spring 2012, according to data published by RootMetrics. When uploading data from a device to the network, speeds had fallen about 20% over the same period. Data for New York showed a slight uptick in download speed, said RootMetrics Chief Executive Bill Moore. Overall, Verizon's network reliability remains high, Mr. Moore said. In Chicago, those speeds still are better than on the networks of T-Mobile US Inc. and Sprint Corp., but Verizon's speed trails AT&T and T-Mobile in San Francisco. Overall, Verizon's network speed still exceed its stated goals. "4G LTE is about more than just speed," Verizon spokesman Tom Pica said in an email. "While speed is a plus, a consistent, reliable experience on 4G LTE when and where customers want it, remains the primary goal of our 4G LTE service."

Despite the headaches, Verizon Wireless is pushing ahead on video. Customers of Verizon communication's cable service, FiOS, can watch 25 channels on their smartphones outside the home. Verizon Wireless said last week that it had agreed to buy EdgeCast, a company that helps deliver video over the Internet. That followed the acquisition of a similar company, upLynk, last month. Globally, about 35% of all mobile traffic is video, and that number is expected to grow by about 55% each year, according to Ericsson, a network-equipment maker based in Sweden. More than 50% of the traffic on AT&T's overall network is video, Mr. Stephenson said at an investor conference in September. More than a third of Verizon's customer base is on its LTE network, yet those users account for about 64% of all data use.

Jason Perlow, a Verizon Wireless customer in Fort Lauderdale, Fla., said his video consumption rose sharply as soon as he started using Verizon's LTE network in 2011. "I was sucking down data constantly," he said. Mr. Perlow, a computer engineer, said he uses his smartphone to watch two to four Netflix videos per week when he is traveling. In the past year, he says he has noticed that video streams at a lower quality, and it has longer pauses for buffering, especially in cities such as Miami, New York and Seattle.

Verizon had a larger loss share of subscribers in New York and Chicago this November than it had in other cities, according to Comlinkdata, a telecommunications research firm, but the reason is unclear. Verizon said last week that it was fortifying 49 of its roughly 300 cell sites in the New York area. About a dozen of them "had issues with capacity," according to Mr. McAdam, the CEO. The company has completed work on about 42 of the sites. "We are, I think, now back where we want to be, with exception of those couple of cell sites we have got left," Mr. McAdam said. "I think it is a short-term blip, and this just proves that you have got to stay ahead of the demand," he added. Wall Street Journal